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VAT charges in residential and commercial leases

VAT charges in residential and commercial leases

VAT is not applicable for grant of residential lease. Hence, no such express provision is discussed in the context of residential leases. However, when the tenant is made to pay for the landlord’s legal and other costs, VAT becomes applicable. This should be clearly explained in the lease along with other details.

Commercial leases

Although, commercial leases are ideally exempt from payment of VAT, it is up to the landlord to waive this exemption and charge VAT. When the landlord chooses to charge VAT, this should be added to the agreed rent. However, s89 of the VATA Act 1994 states that landlords can charge VAT only if the lease includes a provision permitting so.  Thus, it is common for all commercial leases to include this provision.

It is also usual for the lease to include a provision where the rental payments shall remain suspended during the term of period when the property is unusable. Landlords try and limit this provision by mentioning that this exemption is limited to cases where the damage, etc has been caused by an insured risk. Therefore, a tenant should carefully examine the list of risks that are insured and make sure all potential dangers are covered. If damage is caused by an uninsured risk, the tenant will have to continue paying the rent with no insurance money to repair the damage.

Photo courtesy: godo godaj

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